Chapter 7

Question 1

bond refunding

Answer 1

The process of replacing all or part of an issue of outstanding bonds.

Question 2

call premium

Answer 2

Amount by which the call price exceeds the par value of the bond.

Question 3

call provision

Answer 3

Agreement giving the corporation the option to repurchase the bond at a specified price before maturity.

Question 4

Canada plus call

Answer 4

Call provision that compensates bond investors for interest differential, making it unattractive for an issuer to call a bond.

Question 5

Canada yield curve

Answer 5

A plot of the yields on Government of Canada notes and bonds relative to maturity.

Question 6

clean price

Answer 6

The price of a bond net of accrued interest; this is the price that is typically quoted.

Question 7

coupon

Answer 7

The stated interest payment made on a bond.

Question 8

coupon rate

Answer 8

The annual coupon divided by the face value of a bond.

Question 9

debenture

Answer 9

Unsecured debt, usually with a maturity of ten years or more.

Question 10

default risk premium

Answer 10

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

Question 11

dirty price

Answer 11

The price of a bond including accrued interest, also known as the!full!or!invoice price. This is the price the buyer actually pays.

Question 12

face value or par value

Answer 12

The principal amount of a bond that is repaid at the end of the term.

Question 13

Fisher effect

Answer 13

The relationship between nominal returns, real returns, and inflation.

Question 14

indenture

Answer 14

Written agreement between the corporation and the lender detailing the terms of the debt issue.

Question 15

inflation premium

Answer 15

The portion of a nominal interest rate that represents compensation for expected future inflation.

Question 16

interest rate risk premium

Answer 16

The compensation investors demand for bearing interest rate risk.

Question 17

liquidity premium

Answer 17

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.

Question 18

maturity date

Answer 18

The maturity date is the date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due

Question 19

nominal rates

Answer 19

Interest rates or rates of return that have not been adjusted for inflation.

Question 20

note

Answer 20

Unsecured debt, usually with a maturity under 10 years.

Question 21

par value

Answer 21

face value or par value. The principal amount of a bond that is repaid at the end of the term.

Question 22

protective covenant

Answer 22

Part of the indenture limiting certain transactions that can be taken during the term of the loan, usually to protect the lender’s interest.

Question 23

real rates

Answer 23

Interest rates or rates of return that have been adjusted for inflation.

Question 24

retractable bond

Answer 24

Bond that may be sold back to the issuer at a prespecified price before maturity.

Question 25

sinking fund

Answer 25

Account managed by the bond trustee for early bond redemption.

Question 26

stripped bond or zero-coupon bond

Answer 26

A bond that makes no coupon payments, thus initially priced at a deep discount.

Question 27

term structure of interest rates

Answer 27

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.

Question 28

yield to maturity (YTM)

Answer 28

The market interest rate that equates a bond’s present value of interest payments and principal repayment with its price.